Problems with extended warranties – Scambook

As per usual with almost every article about extended warranties they are saying why you don’t need an extended warranty. I felt it is only fair to give you a more in depth analysis of these problems so you can make an informed decision.

They were even kind enough to put the blog post into this handy video over view for those of you who prefer to watch videos rather than read.

http://www.youtube.com/watch?v=AyM42eieMHY&f

You can read it in full on their blog post or in the video but in summary their argument is:

1. Repairs might be cheaper. CNET reviewed extended warranty plans for many consumer electronics, such as televisions and computers, and found that the cost of a one-time repair is often cheaper or the same price as the extended warranty.

The cost of an extended warranty may be marked up to cover the salesperson’s commissions or boost the store’s profit margin. As a result, it might make more sense to skip the extended warranty purchase and just save your money. You may never need to spend it if your product doesn’t break.

2. The extended warranty might not cover everything. Sometimes, extended warranty plans only cover manufacturing defects, not the natural wear and tear that happens from using the product. Your repairs or replacements might not be covered if the damage was caused by something other than a defect. Additionally, many extended warranties don’t cover accidents like drops or spills. Don’t be mislead by the sales pitch. If you’re buying an item that’s prone to accidental damage, such as a laptop or a cell phone, make sure you read the fine print very carefully before you consider buying a warranty.

3. Credit cards give you extra protection for free. If you’re paying with plastic, most credit cards automatically extend a product’s manufacturer warranty by one year. Depending on the terms and duration of the extended warranty offered by the store, you might not need it if you’re charging the purchase. It’s another one of the many consumer protections offered by credit card companies. Check your card holder policy or go online to your credit card company’s website for more details.

4. Most products don’t break. Statistically speaking, most products don’t need repairs. WSFA 12 News gathered some statistics from Consumer Reports to compile a list of the top consumer products most likely to need repair within the first three years. Desktop and laptop PCs top the list but even then, the repair rate is under 40%!

My response to these problems with extended warranties

I will give my view-point on each point individually.

1. Repairs might be cheaper.

Repairs absolutely might be cheaper but they also might not be. If you do not make a claim on the extended warranty then the extended warranty will definitely cost more than the repair because you didn’t have to pay for a repair. Some of the benefit of purchasing an extended warranty is that it should be cheaper if you need a repair. Equally the hassle of finding someone and somewhere to get the product repaired and then getting it actually repair can be inconvenient. For someone who may live a busy life there may be other things they want to do with their time which may be of more value such as spending time with family or going to work.

Buying an extended warranty purely on the potential cost saving is a choice you make based upon how much risk you willing to take and what the consequences are based upon your choice. If you decide that the only reason you want to buy the extended warranty is to save money then you need to make this decision based upon knowing the chances of the product going wrong, the cost of repairing different elements and the cost of the extended warranty. Until manufacturers are more transparent about how likely products are to go wrong and how much they will cost to repair the only thing you can look at is the cost of the extended warranty. If you do not shop around and compare the different extended warranties then it is less likely you will make the best decision for you. If you find the most competitively priced product on the market then you will more than likely get a better deal where the cost of the warranty is a lot lower and the chances that a repair might be more expensive than the extended warranty.

2. The extended warranty might not cover everything.

This is quite true. Not all extended warranties are created equally. However I do not think this is a reason to rule out extended warranties in general. If you understand the differences between the extended warranties you are looking at buying then you can make an informed decision about which one to buy and whether you should or shouldn’t buy an extended warranty.

Generalising like this is like saying because some restaurants sell bad food you shouldn’t go to any restaurant. Absolutely if you go to a restaurant without looking at reviews or researching the restaurant you might get a bad meal but if you do you research and look around at the options available to you then you can make an informed decision which will be the best decision for you.

3. Credit cards give you extra protection for free.

In America where Scambook is based I believe credit cards more frequently offer extended warranties as a perk of buying a product with certain credit cards. In the UK this is less common. There are a handful of credit cards out there which offer this service but not many. Unless this benefit was mentioned to you when you signed up for the card then you probably do not have this cover.

For those credit cards who do cover you for an extended warranty it is usually for one year extra which may or may not be long enough to meet your needs. Make sure you make an informed decision based upon understanding all of the information in the fine print of your credit card terms and conditions.

4. Most products don’t break.

An extended warranty covers you against the risk of you having to repair or replace a product should something go wrong with it. With the continual pressure put on manufacturers from retailers and consumers to make products cheaper and cheaper they inevitably will cut corners to make the product as aggressively priced as possible.

If a product is sold with a manufacturers guarantee of 1 year why would they design it to last for 5 years? If it was good enough to last for 5 years then they would guarantee it for 5 years. This would help them sell more products. If they did this then consumers wouldn’t need extended warranties. If it was designed to last for 5 years it would need to have been made from better materials and possibly better manufacturing processes. All of these things will cost more to make and therefore put the cost up. If a manufacturer’s product stopped working after 53 weeks – just after the year’s guarantee ran out then they would not earn a very good reputation.

Scambook referenced some research by Consumerreport.org which says the likelihood of a product breaking with in the first 3 years. Which ranged from a desk top pc being at 37% down to a microwave at just 17%. Whatever the risk what you are buying is the peace of mind that whatever happens you do not have the hassle of finding someone to repair the product and paying for the repair.

If you understand what you are buying, you shop around for a good deal and you understand the peace of mind it gives you then you can be more confident in making a decision about if you should buy an extended warranty and if so what one.

Summary

If you are making a decision without all the information available to you, with out shopping around I agree with every point they make in the Scambook post. However no one can deny that in principle everyone would want an extended warranty if it was given to them. The decision you need to make is do you get enough value in exchange for the amount of money it costs.

If you have information about the whole market and you are given transparency of what each extended warranty includes and excludes you can make the right decision for you based upon your approach to risk and the value you get from the extended warranty.

Your thoughts?

What do you think of the scambook post? Do you agree or disagree with my response to the issues they raise?

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